Loans and Profits

4 Replies

Hello, I'm new to buying and selling real estate, so sorry if this question bugs anyone, but I'm just trying to get a better hold of what I've been reading into for a few weeks. What I was wondering is If I bought a property  for $85,000 and renovated the property with $25,000 using a 203k loan then selling the property for 143,000. My profits should be $33,000 but what other fees would I have to look into including the real estate agents commission to get the true profit amount, and if it's even worth it to buy such a property to flip. 

Hi Le,

When you sell a property - you typically pay the listing agent 3% of the sale price and you pay the buyer's agent 3% - a total of 6% of the sale price goes to the real estate agents/companies.  You also have to pay closing costs which is several thousand dollars. 

While you own the property, you need to calculate the costs associated with owning a property such as taxes, insurance, utilities, and possibly HOA fees. If you are interested in buying and flipping a property, then you'll definitely want to calculate these 'holding costs' - basically from the time you buy the property to the time you sell it. If things fall behind and remodeling either takes a lot longer or costs a lot more, or even if it takes a while to sell the flipped property, then this will significantly impact your profit.

For the property you referenced above, the 6% agent commissions will leave you with $134,420, or a profit of $24,420 - not including closing costs for both buying and selling the property, and not including the costs I mentioned above.  I personally don't think it sounds like a great deal, since you may only make $10,000-$15,000 in the best case scenario and it will probably involve several months of your time and effort.  

Hope this helps.

-Jay

Thank you Jay! That information definitely helped a lot, there's still a lot more I need to learn before I completely invest. I appreciate the wonderful response!

@Le Nguyen  I personally just plan on 10% of the deal in cost its close and an easy number. Of course you have to save back some money for taxes as well.

I would not consider such a deal. the is something here called the 70% rule. It is a common formula to quickly evaluate a rehab deal.  You should do a more complete analysis but this is a quick crude test. A search will bring a ton of posts about it. 

Typically the hidden costs you are speaking of "Soft Costs" are about 15% of a deal but can be as high as 20% with expensive financing costs.

  • Closing costs to buy
  • Transfer taxes to buy
  • financing interest cost 
  • financing points cost
  • taxes while holding
  • utilities while holding
  • insurance while holding (Builders risk 2 to 3 X as expensive as regular insurance)
  • Closing costs to sell
  • 3% closing help for buyer
  • 6% real estate commission

This is not a complete list but it will give you an idea.

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